What CD rates are and how they're set

A CD rate is the interest percentage a bank pays you for locking your money away for a fixed period — typically three months to five years. The bank uses your deposit to lend to other customers or invest, and shares a portion of what it earns back to you as interest.

Banks set their own CD rates based on what the Federal Reserve does with its benchmark interest rate. When the Fed raises rates, banks generally raise CD rates within days or weeks. When the Fed cuts rates, CD rates fall. But banks don't move in lockstep — a bank with excess deposits might offer lower rates, while a bank desperate for cash might offer higher ones to attract deposits.

The rate you see advertised is the Annual Percentage Yield (APY), which accounts for compounding — the way interest earned gets added back to your balance and earns interest itself. A CD advertising 4.50% APY will actually pay you slightly more than 4.50% if interest compounds monthly or daily, because you're earning interest on your interest.

Key Takeaways

  • CD rates move with Federal Reserve policy but vary between banks, so comparing rates across at least three institutions before opening a CD is standard practice.
  • Longer-term CDs (two to five years) typically pay higher rates than short-term ones (three to six months), though this relationship sometimes reverses when the Fed is cutting rates.
  • Online banks and credit unions often offer higher CD rates than brick-and-mortar banks because they have lower operating costs.
  • The rate you lock in stays fixed for the entire term — if rates rise after you open your CD, you don't benefit, but you also don't lose if rates fall.
  • Your CD is insured up to $250,000 per bank through the FDIC, so the bank's stability matters less than the rate itself.

How CD terms affect the rate you receive

The longer you agree to lock your money away, the higher the rate usually is. A three-month CD might pay 4.25% APY, while a five-year CD from the same bank might pay 4.75% APY. Banks pay more for longer commitments because they can count on having your money for years and plan their lending around it.

This pattern — called the yield curve — sometimes inverts. When the Fed is cutting rates or when banks expect rates to fall, a one-year CD might actually pay more than a three-year CD. This happens because banks expect rates to be lower in the future and want to lock in longer-term deposits now while they can still offer competitive rates.

The shortest CDs (three and six months) are most sensitive to Fed moves. If you open a three-month CD at 4.50% and the Fed cuts rates before it matures, the next three-month CD you open will pay less. Longer-term CDs insulate you from rate drops — your 4.75% five-year rate stays 4.75% even if the Fed cuts rates in year two.

Why rates differ between banks and account types

Online banks typically offer the highest CD rates because they don't maintain physical branches, pay lower rent, and employ fewer staff. A national online bank might offer 4.85% APY on a one-year CD while a regional bank down the street offers 3.50% for the same term. The difference is real and worth shopping for.

Credit unions often compete with online banks on rates, especially for members. Some credit unions offer promotional rates on CDs for a limited time to attract deposits. These rates are real — not a bait-and-switch — but they may revert to lower rates when the promotion ends.

Banks sometimes offer different rates for different account types. A CD opened through a brokerage account might have a different rate than one opened directly at the bank. Some banks offer higher rates if you maintain a checking account with them or if you're a new customer. These variations are worth asking about when you're comparing.

How current economic conditions shape CD rates

CD rates track the Fed's benchmark rate, which was near zero in 2020 and 2021. When the Fed began raising rates in 2022, CD rates climbed steadily. By late 2023, one-year CDs were paying around 5.00% to 5.35% APY at competitive banks. As of early 2024, rates have begun to stabilize and some have drifted slightly lower as markets anticipate Fed rate cuts.

Inflation also influences what rate matters to you. If a CD pays 4.50% APY but inflation is running at 3.50%, your real return — what you actually gain in purchasing power — is about 1.00%. During periods of high inflation, even seemingly attractive CD rates may not keep pace with rising prices.

The shape of the yield curve affects which CD term makes sense for you. When short-term rates are nearly as high as long-term rates, there's little incentive to lock money away for five years instead of one. When short-term rates are much lower than long-term rates, a longer CD locks in a better return.

Where to find and compare current CD rates

Most banks publish their CD rates on their websites, but you have to visit each one individually. Comparison sites like Bankrate, DepositAccounts, and CD Ladder aggregate rates from hundreds of banks and let you filter by term length and sort by APY. These sites update daily and show you which banks are offering the highest rates for each term.

When comparing, check the minimum deposit required — some banks require $500, others $10,000 or more. Also verify the bank is FDIC-insured by searching the FDIC's BankFind tool. A rate that's 0.50% higher than competitors is worthless if the bank fails and your deposit exceeds the $250,000 insurance limit.

Call or email banks directly if you're considering a large deposit. Some banks will negotiate rates or waive minimum deposit requirements for deposits above a certain threshold. This is especially true at regional banks and credit unions, which have more flexibility than large national chains.

What happens to your rate when the CD matures

When your CD term ends, the bank will either automatically renew it at the current rate for the same term, or move the money to a savings account. Check your CD's terms — most banks send a notice 10 to 14 days before maturity telling you what will happen. If you don't want automatic renewal, you can withdraw the money or move it to a CD with a better rate elsewhere.

If rates have fallen since you opened your CD, the renewal rate will be lower. If rates have risen, the renewal rate will be higher. You're not locked in to the renewal rate — you can always shop around and move your money to a bank offering better terms. There's no penalty for moving your CD to another bank after it matures.

Frequently Asked Questions

Do I have to take the renewal rate my bank offers?

No. When your CD matures, you can withdraw the money without penalty, move it to another bank's CD, or ask your bank to hold it in a savings account while you decide. You have a grace period — usually 7 to 10 days — to make changes before automatic renewal happens.

Why is my bank's CD rate lower than the rate I see online?

Online banks have lower overhead and can offer higher rates. Regional and local banks may offer lower rates because they're not competing nationally for deposits. If you value in-person service or already bank there, the convenience may be worth the lower rate. Otherwise, opening a CD at an online bank takes 10 minutes and costs nothing.

Can I withdraw money from a CD early without a penalty?

Most CDs charge an early withdrawal penalty if you take money out before the term ends. The penalty is usually three to six months of interest. Some banks offer no-penalty CDs that let you withdraw anytime, but these pay lower rates to offset the bank's risk. Check your CD's terms before opening it.

What's the difference between APY and APR on a CD?

APY (Annual Percentage Yield) includes compounding — the way interest earned gets added back and earns interest itself. APR (Annual Percentage Rate) does not. Banks must show you the APY on CDs, which is the number that matters for comparing rates between banks.

If rates rise after I open a CD, can I switch to a higher rate?

Not without closing the CD early and paying a penalty. This is the tradeoff of a CD — your rate is locked in and protected if rates fall, but you can't benefit if rates rise. Some banks offer CD ladders (opening multiple CDs with different maturity dates) to balance this risk.